1.

Accounting for Fund under the administration of the entity:

Summary:

To Establish the Sinking Fund: Transfer cash to the fund account Sinking Fund Cash XX
Cash XX
To record appropriation of Retained Earnings: appropriate free retained Retained earnings XX
earnings equal to the fund initially established. Retained earnings App. XX

To record purchase of fund securities: Reclassify the amount used to Sinking Fund Securities XX
purchase securities from SF-cash to SF-Securities. Sinking Fund Cash XX

Fund Income received Sinking Fund Cash XX

Sinking Fund Income XX
Fund income earned but not yet received Accrued interest receivable XX
Sinking Fund Income XX
End of the accounting period: Increase of the total fund requires Retained Earnings XX
additional appropriation of retained earnings. Retained Earnings appropriated XX
Sale of Sinking Fund Securities at a gain Sinking Fund Cash xx
Sinking Fund Securities xx
Gain on sale of SF securities xx
Retirement of liability using the Fund Bonds payable XX
Sinking Fund Cash XX
To record payment of liability out
of the fund.
Transferring back the excess Fund to the general cash account. Cash XX
Sinking Fund Cash XX
Release of the retained earnings appropriated for the fund. Retained earnings appropriated XX
Retained earnings XX

Accounting for Fund under the administration of the entity: The following transactions are provided to facilitated
discussion of Fund under the administration of the entity:

Isabella Company’s transactions on its sinking fund are as follows and it also maintains retained earnings appropriation
for that matter.

Dec.31,20A To record 4,000,000 of cash transferred to the sinking fund. Sinking Fund Cash 4,000,000
Cash 4,000,000

To record appropriation of retained earnings to the fund. RE- unappropriated 4,000,000

RE- app. for SF 4,000,000

On April 1, 20B, the P4,000,000 sinking fund cash was invested in 12% bonds, Sinking Fund securities 4,000,000
the purchase price equal to the face value of 4,000,000. The investment pays Sinking Fund cash 4,000,000
semi-annual interest on April 1 and October 1. To record purchase of
sinking fund securities from SF – cash.
Sinking fund cash 240,000
October 1, 20B Received the interest on the SF securities. Sinking fund income 240,000
 Dec. 31, 20B Transferred another 4,000,000 to the sinking fund. Sinking fund cash 4,000,000
Cash 4,000,000

Dec. 31, 20B Accrual of interest for the year end. Accrued interest receivable 120,000
Sinking fund income 120,000

Dec. 31, 20B Appropriated RE equal to the fund R/E- unappropriated 4,360,000
R/E- approp. for SF 4,360,000
The total Sinking fund amounted to 8,360,000 composed of SF Cash 4,240,000; SF securities 4,000,000; Accrued interest
of 120,000. Whereas the retained earnings appropriated had a ledger balance of 4,000,000, therefore it requires an
additional appropriation of 4,360,000 to equate the amount of retained earnings with the Sinking Fund balance.

• If a sale of SF securities at 105 is later made, the entry would be: Sinking fund cash 4,200,000
Sinking fund securities 4,000,000
Gain on sale of securities 200,000

• If the fund is used to retire a liability for which it was set up Bonds payable (face value) XX
example retirement of a bond. Interest expense XX
Sinking fund cash XX

• The entry to record the return of the sinking fund cash to the Cash XX
general fund is: Sinking Fund XX

• The release of the appropriated retained earnings is: Retained earnings appropriated XX
Retained earnings unappropriated XX

When the fund has been used for what it has been set up for, then the cash balance should be returned back to the
general cash account, while the retained earnings appropriation must be cancelled.

To determine the balance of the Sinking Fund cash balance to be returned to the general cash account, it is easier if the
ledger or T-account is used.

2. Fund under the administration of a trustee:

Fund under the administration of a trustee maintains only one account title which is Sinking Fund – trustee and does not
need the details composing the fund.

Further, recording of the transaction about the fund can only be made when the company receives the report from the
trustee. Such report includes purchase, sale of securities, earnings and expenses of the fund.

• Establishing the fund by transferring cash from the general account to an account debited as Sinking fund –
trustee is required to separate it from cash which is not restricted. The proforma entry is as follows:

Sinking Fund - Trustee XX

Cash XX

Hence, this cash fund is classified as noncurrent asset.

From the trustee’s report; the following are analyzed altogether to prepare one compound entry regarding the effect of
the report on the sinking fund – trustee;

• When the trustee reports about fund expenses out of the fund; recording sinking fund expense with the same
deducted from sinking fund – trustee is done. Hence, the entry will be as follows:

Sinking fund expense XX

Sinking Fund – Trustee XX

• The recognition of sinking fund income for interest received or earned with same amount increases the sinking
fund- trustee. The entry the is:

Sinking Fund – trustee XX

Sinking Fund Income XX

• Gain or loss on sale of securities is recognized when sale of securities above cost or below cost is reported by the
trustee. Gain on sale increases sinking fund - trustee while loss on sale of securities decreases sinking fund –
trustee.

Sinking Fund – trustee XX

Gain on Sale of Securities XX

These entries are not individually recorded because the analysis of the trustee’s report is done periodically and hence,
from that report, a compound entry to take into the effect of the transactions on the Sinking Fund on the hands of the
trustee.

• When the trustee reports that fund has been used to pay off liability for which it was set up for, the entry will be:

Bonds payable XX
Sinking Fund – trustee XX

Since the sinking fund has been used to pay off the liability for which it has been established, therefore the entity will
now receive the remittance from the trustee of the remaining balance of the sinking fund – trustee and the amount shall
be reclassified to the general cash account which is unrestricted.

Transactions/illustrations: Adapted Valix 2017 page 965)

a. Contributed 4,000,000 to the sinking fund under a Sinking fund – trustee 4,000,000
trustee. Cash 4,000,000

b. Trustee’s report contained the following: cash

No entry is necessary.
1,000,000, 2,000,000 was invested in securities, 1,000,000 in
money market placements.

c. Received a periodic report from trustee: securities Sinking fund – trustee (4560-4000)560,000
were sold for 2,600,000 and interest received on the money Sinking fund expense 140,000
market placements was 100,000. Sinking fund income 100,000
Gain on sale of securities 600,000
Trustee’s Report:

Sinking fund cash 1,000,000

Money market placement 1,000,000
Total 2,000,000
Receipts:
Sale of securities 2,600,000
 Interest 100,000 2,700,000
Total 4,700,000
Disbursements:
Trustee’s fee 100,000
Admin. expense 40,000 140,000
Sinking fund balance 4,560,000

Bond’s payable 4,000,000

d. When a trustee pays a company’s bond liability of
Interest expense 400,000
4,000,000 with interest of 400,000 out of the fund, the entry
Sinking fund – trustee 4,400,000
is:
Cash 160,000
e. Received remittance from the trustee of the balance.
Sinking fund-trustee 160,000
To transfer back the fund to general cash account.
Since the purpose of the fund to retire a bond liability has been met, then the sinking fund should be returned back to
the general cash account.

Sinking Fund Contribution.

• The amount of contribution to the fund can be voluntary or mandatory.

• The annual contribution may be at the end of each year, in advance or can also be made one time contribution.
• When the annual contribution is at the end of each year, the amount to be accumulated is to be divided by the
future value factor in an annuity of 1 at a certain percent for the many periods in order to get the annual
contribution required.
• When the annual contribution is made at the beginning of each year or in advance, the amount to be
accumulated is to be divided by the FV of an annuity of 1 in advance at 12% for certain years to get the annual
contribution required.
• In case of a One time contribution, to get the one time contribution at the start of the year, the amount to be
accumulated shall be divided by the FV of 1 at 12% for certain many years.

The preparation of the table of accumulating the fund, the first annual contribution is multiplied to the rate(%) used to
get the first year’s interest. To get the second year’s interest, the fund balance of the first year is multiplied to the given
rate (%).

Fund balance is the annual contribution plus interest.

Illustration:

Example 1: To accumulate 2,000,000 at the end of year 4, what is Date Interest Contribution Fund balance
the annual contribution at the end of each year if it is at the rate of
12/31 418,471 418,471
12% compounded annually?
12/31 50,217 418,471 887,159
Step 1: Get the future value factor of an ordinary annuity 1 at 12%
for 4 years. It is 4.7793. 12/31 106,459 418,471 1,412,089

Step 2: Divide 2,000,000 by the FV factor. It is 418,471. 12/31 169,440 418,471 2,000,000

Example 2: Same data as above except that the annual Date Interest Contribution Fund balance
contribution is made at the beginning of each year or in advance.
1/1 373,636 373,636
 Step 1: Get the FV of an annuity of 1 in advance at 12% for 4 years 1/1 44,836 373,636 792,108
which is 5.3528.
1/1 95,053 373,636 1,260,797
Step 2. Divide 2,000,000 by 5.3528 which is 373,636.
1/1 151,296 373,636 1,785,729
12/31 214,271 2,000,000

Example 3: One time contribution. In a one-time Date Interest Contribution Fund balance
contribution, get the FV of 1 at 12% for 4 years which is
1/1 1,271,052
1.5735 and divide 2,000,000 by that factor.
12/31 152,526 1,423,578
12/31 170,829 1,594,407
12/31 191,329 1,785,736
12/31 214,288 2,000,000

3. Preference Share Redemption Fund, Contingency Fund and insurance fund.

• Preference share redemption fund is among the non current assets of an entity in its statement of financial
position.

Thus, discussions on preference share redemption fund is simple. It involves two accounting considerations;

a. The setting up of the fund; and the

b. Redemption of the preference shares using the fund.

The journal entries involve on the above mentioned are provided for as follows:

Preference Share redemption fund XX

Cash XX
To record establishment of the fund.

Preference share capital (par value) XX

Retained Earnings XX
Preference Share Redemption Fund XX

To record redemption of preference shares.

• Understanding the entry provided, the difference in redemption price and the par value of the preference share
is charged against retained earnings and not to be regarded as loss because this is in equity.

• On the other hand, Contingency Fund focuses upon its purpose which is for meeting obligations arising from
contingencies. Hence, the two accounting considerations are as follows:
A. The establishment of the fund
B. The entry when the fund is used to pay for contingency.

For example, a company that has an expectation regarding an event (lawsuit in which it is probable that the company
may lose the suit) that has occurred having negative impact on the company, establishes a fund for the matter. The
purpose of which is for the company to have readily available funds when the settlement is due. The entries on the said
events were as follows:
 Contingency Fund XX
Cash XX

To establish the contingency fund.

Loss on lawsuit XX
Contingency fund XX

To record payment of lawsuit settlement out pf the fund.

Illustration: A building with accumulated depreciation of 1,800,000 and a historical cost of 4,800,000 has been
completely destroyed by an explosion which is currently under investigation. The owner entity of the said building has
no insurance for the building except that it created its own fund which it has annually contributed 240,000 for five years
amounting to total of 1,200,000.

After sometime, the entity builds a new building using the fund. The total cost of the building amounted to 6,000,000.

The following entries are prepared for the transaction above in connection with the entity’s insurance fund.

To record the annual contribution to the fund, the entry is:

Insurance Fund 240,000

Cash 240,000

To record the building that has been destroyed by explosion:

Accumulated Depreciation 1,800,000

Loss on Fire 3,000,000
Building 4,800,000

To record the new building constructed:

Building 6,000,000
Insurance fund 1,200,000
Cash 4,800,000